Class Warfare, Romney-style

It’s not helping the economy to pit the people who are the engine of the economy against the people who rely on that engine.

The guy goes on to explain that Wall Street backed Obama in 2008 and now is switching sides in reaction to Obama’s rhetoric and policies. Surely he’s right about Wall Street’s shift in affection. What is striking is his belief, forthrightly expressed and no doubt deeply felt, that Wall Streeters are the “engine” of the American economy.

Yesterday, the Times told this story, about a scientist couple from Boston who were among the pioneers of speech-recognition software. After decades of work and building a successful company, they were ready to sell their life’s work to a larger entity. They contracted Goldman Sachs to help them sort through the complications of a finding a suitable buyer. To make a long story short, for a $5 million fee, Goldman set them up with a Belgian firm, which took over the company in exchange for stock. Three months later, the Belgian company went bankrupt–it had apparently inflated its stock price with fraudulent earnings. Goldman, for its $ 5 million fee, did zero due diligence. The couple which had developed the speech-recognition software lost everything. A Goldman banker quoted in the story said Goldman did a “great job” and “we guided them to a completed transaction.” Apparently the case will go to court in November.

The tale seems so emblematic of the current age: the investment bankers reap large profits regardless of the impact of their work. They have the money to give generously to political candidates who represent their interests, and to cap it off, the chutzpah to proclaim themselves “the engine” of the American economy. Romney surely had that image of himself while a corporate raider at Bain, even as the main thrust of his work was stripping the assets of companies for the benefits of his partners.

I remember a time when financiers who talked about themselves in such language would have been laughed at — yes, even in the Hamptons. There was a Wall Street, and people who worked there made good money. But Americans’ admiration went to the people who actually created tangible goods or developed innovative products. Talent, drive, dedication were admired, and there was no big brief for a leveling equality. No one thought that Henry Ford (before my time, actually) contributed no more to the common good than the average assembly line worker. But neither did anyone believe in the absurdity that financiers –the lubricants perhaps of a successful economy–were synonymous with the engine itself.

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8 Responses to Class Warfare, Romney-style

70% of the American economic engine is made up of consumers buying stuff. The real “class warfare” is reflected in stagnant wages despite productivity gains over the last 30 years, a shift in the overall tax burden away from capital and on to labor, an explosion of economic rent seeking, the errection of toll booths on public assets, and in labor arbitrage or outsourcing to lower wage countries. As Warren Buffett famously said, “My class is winning.”

No one (at least that I know of) is envious of the rich. In fact, I am one and I am not envious of me or anyone else.

Class warfare, when used by some rich people, is a euphemism for “I don’t want to pay any more taxes.” It is a canard created by Lobbyists, like Grover Norquist, to protect even wealthier industrialists and coupon clippers who only create jobs as a last resort and never in this country if it can be avoided. Those who rightly warn that growing wealth and income disparity is bad for democracy and the future health of the economy are rightly worried that our economic engines will eventually take to the streets with pitchforks and torches or storm the Bastile. Even the father of conservatism, Edmund Burke, himself, observed this and founded a movement as a result. Today, he is turning in his grave.

Those, like Mitt Romney, who don’t seem at all self aware, can hardly call themselves conservative. Aristocratic, oligarchic, or plutocratic maybe, but not conservative. And Marie Antoinette was never considered to be the economic engine of 19th century France.

You’re right that this is a strange new culture you describe. It’s worth noting that the assertion that Wall Street is the engine of the economy is unwarranted. From a post I did awhile back:

Former Fed Chair Paul Volcker said a few years ago, “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence”, before concluding that the only worthwhile financial innovation of the past twenty years was the ATM.

Daniel Foster at the National Review(!) links to this 2009 paper, which he describes as follows: “investment banking was basically easy, and boring, in the heavily regulated period between 1930 and 1980; that subsequent deregulation and the rise of exotic financial products created great demand for high-skilled workers, thus increasing both wages and the opportunity for profit in the financial sector; but that, nevertheless, financial workers are overpaid. In part by comparing the compensation of financial workers and engineers with similar innate abilities and education levels, the paper concludes that as much as 30-50 percent of financial compensation is pure rent.”

This Kauffman Foundation study concluded that “the industry’s growing size potentially suppressed entrepreneurship as financial services and young companies compete for many of the same employees”.

From Man-Sized Target, a quote from fund manager Jeremy Grantham: “… Let us say that by 1965 – the middle of one of the best decades in U.S. history – we had perfectly adequate financial services. Of course, adequate tools are vital. That is not the issue here. We’re debating the razzmatazz of the last 10 to 15 years. Finance was 3% of GDP in 1965; now it is 7.5%. This is an extra 4.5% load that the real economy carries. The financial system is overfeeding on and slowing down the real economy. It is like running with a large, heavy, and growing bloodsucker on your back. It slows you down.”

Finance used to be and should be the servant of industry. But for the last few decades, finance has become the master of industry. Three decades ago, finance accounted for about ten percent of corporate profits in the United States. But on the eve of the financial meltdown, finance accounted for over forty percent of corporate profits in the U.S. After the meltdown, finance’s share of profits went down to about a quarter, but they’ve gone back up now to over thirty percent. Now I realize that we have an interconnected global economy and the U.S. financial industry serves the entire world. But the U.S. financial industry still got too big as can be seen by the fact that the U.S. government had to bail out several big banks to keep them from taking the U.S. economy down with them. It is unclear how much real value that many complex financial products such as derivatives and credit default swaps have. Conservative economist Luigi Zingales wrote in the article below that large banks prefer to trade these complex financial products “over the counter” which allows for less transparency and collateral. But Zingales says that the government,and specifically Republicans, should require derivatives and credit default swaps to be traded in an organized exchange, which would allow for increased accountability, transparency, and collateral.

“Zingales says that the government,and specifically Republicans, should require derivatives and credit default swaps to be traded in an organized exchange, which would allow for increased accountability, transparency, and collateral.”

Well that’s the natural impulse for sure, but I wonder would it help? Hasn’t it been proven time and again that where regulated industries haven’t been able to move faster and outsmart regulations and regulators they’ve been able to co-opt them and/or Congress?

After all that’s exactly what happened with Brooksley Born’s attempt at the CFTC to regulate the OTC derivatives.

So isn’t the better answer to maybe just make it known you aren’t going to bail out any goddamned concern—or their investors or their creditors—who get involved in any such fancy-ass stuff?

That said, I’d love the old Glass-Steagall Act to be re-instated, a law passed before the modern magic of lobbying got all the power that it did.

But once again look what’s happened since 2008: Despite that meltdown not only has no-one gotten anywhere trying to reinstate that old rule, but the much weaker tea in the proposed Volcker Rule continues to get weaker and weaker and weaker with every iteration Congress gives it.

Let’s face it, I say: No fancy new “solutions” are needed, all we need to do is allow the old ones to work. In this case, the “solution” being the example that exists in failure.

That’s why the bailouts of ’08 were a sort of dual crime: They not only relieved old fools of the wages of the lesson, they deprived future fools of the lesson too.

What was that old quip about the British hanging of an admiral now and then due to it’s salutary effects on its others? Well, where the hell do you end up if you never even allow an admiral to hang himself?